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Operator
Good day and welcome to today's Home Depot fourth quarter earnings conference call.
As a reminder today's conference is being recorded.
Beginning today's discussion is Miss Diane DeHaas, Vice President of Investor Relations.
Please go ahead, Miss DeHaas.
Diane DeHaas - VP - IR
Thank you, Jake and good morning to everyone.
Welcome to The Home Depot fourth quarter 2004 earnings conference call.
Joining us on our call today are Bob Nardelli, Chairman, CEO, and President of The Home Depot, Carol Tome, Executive Vice President and Chief Financial Officer, John Costello, Executive Vice President of Merchandising and Marketing, and Dennis Donovan, Executive Vice President of Human Resources, along with other Home Depot executives.
Bob Nardelli will begin today's discussion with a review of our business, John will provide insight into our merchandising efforts, and Dennis will provide information regarding our greatest asset, The Home Depot associates.
Carol will complete our prepared statement with a discussion of our financial results.
Following our prepared statement we'll open the line for questions.
Questions will be limited to analysts and investors, and as a reminder we would really appreciate it if the participants would limit themselves to one question with one follow-up, please.
This conference call is being broadcast real-time on the Internet at Home Depot.com with links on both our home page and under the Investor Relations section.
The replay will also be available on our site.
Before I turn the call over to bob, let me remind you that today's press release and presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties.
These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the Securities and Exchange Commission.
Now let me turn the call over to Bob Nardelli.
Bob Nardelli - Chairman, President & CEO
Thank you Diane.
Good morning everyone, and thank you for joining us today to discuss our results and accomplishments for the year.
This year, as we celebrated our 25th anniversary, we solidified our leadership position in home improvement, delivering record sales and earnings.
In addition, we're the only company in the Dow to report earnings growth in excess of 20 percent for the last three years.
I'm very proud of our progress in 2004.
These accomplishments could not have been possible without the hard work and dedication of our 325,000 associates.
We celebrate and share our success with our associates in a number of ways.
First, as you know, we launched the Success Sharing program in 2002.
Based on our strong sales results in 2004, we will pay out $90 million to our full and part-time associates, almost double what we paid out in 2003.
Second, we continue to use stock option grants to reward associates throughout the organization, even though there's an economic cost.
This aligns associates with our shareholders, which is the right thing to do.
And finally, the morale and the alignment among our associates has never been higher.
Associates, our competitive advantage, and we are very excited about the four major hiring partnerships that we've established as you'll hear from Dennis Donovan later.
Now as you know, this year was about executing our strategy of enhancing the core, extending the business, and expanding our market.
I'd like to take a moment to reflect on what we accomplished for the year.
First, for the year, our sales were 73.1 billion, a 12.8 percent increase, higher than last year, and a comp of 5.4 percent, which was the best performance for our company since 1999.
Second, for the year, earnings per share were $2.26.
It was 20 percent higher than last year.
This represents the third year in a row that The Home Depot achieved earnings per share growth in excess of 20 percent.
Third, we have continued our focus on returning value to our shareholders.
Over the past four years we've returned a total of 8.9 billion to shareholders through dividends and stock repurchases, representing over 50 percent of our cumulative earnings.
This places us among best-in-class Dow companies, and in 2005 we will continue to focus on creating shareholder value and increasing shareholder return.
During the year, we continued our balanced approach towards capital allocation.
Using our strong cash flow from operations we invested 3.9 billion back into the business and returned close to $4 billion to our shareholders, ending the year with 2.2 billion in cash and short-term investments.
We were able to post these exceptional results in 2004 because of our ability to operationalize and execute our strategy within a strong home improvement industry.
Carol Tome will take you through our financial results in more detail later in the call.
Under our strategy of enhancing the core we improved the overall customer experience through a market back approach to introduce new and innovative merchandise.
This yielded the highest average ticket in our company's history.
And you're going to hear more about this from John Costello later.
Now, during the year, we continued our store modernization program by investing $1 billion in store remodels and refreshes, and using technology to enhance the customer experience by accelerating the speed of checkout.
At the end of the year we had self-checkout in more than 1,000 stores and in all U.S. stores had POS systems which features such as the automatic receipt look up and cordless scan gun.
This technology shortens the time to check out which has been validated in our voice of customer surveys.
During the year we continued our strong, strategic investment in technology spending approximately 600 million to drive productivity and improve the overall customer shopping experience.
Equally in the area of operations, by eliminating tasks and redeploying hours to the sales floor, we achieved a 3 percent productivity improvement in our stores.
We are always working on improving our processes by using new technology, and in 2005, we will launch our special order initiative in our flooring department which we believe will significantly improve the customer experience.
Recently, we combined our U.S. and Mexico stores under the leadership of Tom Taylor, a 22-year veteran of The Home Depot This streamlining of the organization is a natural next step in the evolution of our company towards operational excellence and alignment.
In addition to enhancing our core, we also focused on extending the business by building on our new platforms for growth.
To extend the business, we align customer goals with our own by creating multiple channels of retailing.
Customers now have more options.
They can select from a wider assortment of products through special order, choose The Home Depot to help bring these projects to completion through at-home services, or purchase products through our Web site, homedepot.com.
For fiscal 2004, our services business continued to demonstrate robust growth.
This business grew 28 percent for the year, and we currently have 23 national programs and our rolling out several other national programs such as cabinet refacing and deck installation.
The urban stores that we opened in Manhattan and Park Royal are clearly a success story.
Within just a few months, our first store in Manhattan hit number one in sales across several product categories, and our second store in that market is off to a strong start.
Our strategy of opening new store formats is consistent with our plan of operating along multiple growth platforms where the size and the structure and merchandising and services offered differ based on locations and market preferences.
Because of our flexibility and adaptability we know there's plenty of room for growth.
In 2004 our expansion strategy continued with our growth in Home Depot Supply business and the addition of 41 stores outside of the United States.
The Home Depot Supply which represents approximately 3 percent of our business includes companies like White Cap, Your Other Warehouse, and Builder Solutions Group.
We're very pleased with the performance of these companies that have come into our family over the last couple of years.
As we've grown through acquisitions our integration teams have done an excellent job.
We recently combined our Home Depot Supply and in-store Pro Initiative under the leadership of Joe DeAngelo, and I'm confident that we are well positioned for continued growth in this market segment.
Our commitment to creating shareholder value and building our core values has never been higher. 2004 was no exception as we continue to share our values with the communities we serve.
And just to mention a few highlights, we undertook the largest relief and resupply effort in the company's history in response to an unprecedented number of tropical storms in the Southeast United States and donated over $4 million to relief and rebuilding organizations.
We had our first annual National Week of Service with more than 260,000 hours volunteered by associates in just seven days on 1600 projects across North America and China.
We received the Freedom Award from the United States Department of Defense, and we received a 2004 Citizenship In Action Award from the U.S.
Chamber of Commerce.
Now as a result of our performance over the past few years, it's evident that our strategy is working.
So as we enter 2005, we feel confident that our strategy positions us for solid, sustainable growth.
We'll continue to execute and focus on enriching the overall customer shopping experience with a market-back approach capitalizing on other formats, market segments in support of our overall business model.
And now I'd like to turn the call over to John for his comments on merchandising.
John Costello - EVP, Merchandising and Marketing
Thank you, Bob and good morning, everyone.
In early 2004 we communicated our strategy to win customers and drive profitable sales through the combination of distinctive products, great service, and an in-store experience that's evolving to meet our customers' changing needs.
In 2004, The Home Depot team executed this strategy and delivered strong sales growth, margin expansion, and continued our leadership in home improvement.
Thanks to all of our teams for their hard work and extraordinary effort.
Our solid results continue to be driven by the following three areas.
First, growth across our core merchandising categories.
Second, continued success from new innovative and distinctive products.
And third, the positive impact from store modernization.
Let me review each area.
First, growth across our core merchandise categories.
Fourth quarter and full-year results were strong across a broad range of merchandising categories and across North America.
Every department in hard lines, building materials, and our decor businesses posted positive comp increases for both the quarter and the year.
For the year, building materials had the strongest comp increase with a double-digit gain coming from robust sales in gypsum, roofing, concrete, and insulation.
Millwork contributed to our overall performance for the quarter and the year based on strong sales of windows and interior and garage doors.
For the year we experienced strong momentum in our millwork installation businesses as we continued to roll out new programs nationwide, including vinyl and wood windows.
Our millwork department's performance was also helped by improved product presentation and a strong product focus toward our professional customers.
Turning to our garden and seasonal businesses.
We experienced strong comp growth this quarter driven by seasonal categories as well as continued growth in new categories.
We increased our merchandise assortment in fireplace and decorative holiday with an expanded selection of fireplaces and accessories and decorative and artificial trees.
We also saw strength in power equipment resulting from strong demand for snow throwers.
Our cleaning supply business continues to build momentum.
We are well positioned across the store for spring 2005.
This includes the introduction of new products with great values such as Duquesne gas grills.
Lawn Boy mowers, and an expanded assorted of Hampton Bay patio furniture as well as our already strong mix of live goods and seasonal merchandise.
Our kitchen and bath department had strong sales for both the quarter and the year as we continue to introduce new and distinctive merchandise.
We saw strong sales in kitchen and bath installations, counter tops, vanities, and special orders.
Our continued momentum in appliances also contributed to growth in this department.
In 2004, The Home Depot grew core market share faster than any other leading retailer.
According to an independent third party, on a rolling 12-month basis our core market share for appliances increased 190 basis points to 8.1 percent.
These results were driven by a steady stream of innovation and an attractive shopping environment.
Innovative new products and great brands like Maytag, Hotpoint, and our proprietary GE Adora line helped us achieve this growth.
Our on-line appliance sales program, which launched in the fourth quarter, continued to show strong results.
And as we recently announced, our partnership with LG will continue to add breadth to our assortment with the launch of over 15 new LG items in 2005.
Finally, the impact of lumber inflation and comp sales was negligible for the quarter as we anniversaried high commodity prices.
For the total year lumber added approximately 100 basis points to comp sales.
Second, continued success from new, innovative, and distinctive products.
We've implemented a program of consistently introducing new innovative and distinctive merchandise to differentiate The Home Depot and drive sales.
Examples of our continued stream of new and innovative products include the new Ryobi One+ portable power system where a consumer can now buy a starter combo kit and add up to 15 additional tools and accessories that operate off the same power platform.
This system provides our customers with numerous options at tremendous value.
The RIGID Professional power tool line, introduced in late 2003, continues to perform well.
We continue to enhance the initial line of 28 power tools as well as introduce new products and new accessories.
The laser level category has brought innovative technology to the do it yourself consumer.
A strong combination of new products from Ryobi, Black & Decker, and Irwin will be a springboard for numerous new launches for 2005.
In lighting and fans we continue to increase our assortment via our stores, catalogs, and the Internet.
Our new Hampton Bay Gallery collection, ceiling fan and lighting catalogs are in stores now.
Both offer customers extensive additional choices available on a direct ship program right to our customers' doorsteps.
Special orders continued to grow at a pace above our company average when compared to last year.
We expect continued growth in this area as we increase product offerings across our stores.
We continue to offer innovative and new products in other key growth areas such as flooring and outdoor living.
Our line of Charm Glow branded fireplaces expanded into home patio and hearth products providing strong comp growth in these categories.
We also continued to add innovative products and expand our assortments through products like Veranda and Trex decking materials and TrafficMaster stain-proof grout.
These and other innovations are paying off in average ticket growth.
For the quarter and the year, average ticket reached record highs.
For full-year 2004, average ticket increased 7.3 percent to $54.89, and we believe we have considerable upside potential moving forward.
We remain focused on providing compelling values to our customers every day in our stores.
Third, the positive impact from store modernization.
Our customers continue to respond to an improved shopping experience as we invest capital in our stores.
We touched over 30 categories in our stores during the fourth quarter alone and refreshed more than 250 bays over the past year.
Overall for the year, the categories we invested in are collectively outperforming the rest of the store.
We have refreshed categories such as lighting, drapery hardware, door locks, and cleaning chemicals which are delivering double-digit comp sales improvements.
We've also invested in recessed lighting, range hoods, laminate flooring, and water filtration.
These categories are also reporting positive comp performance.
As we mentioned in our January investor conference, we will continue to invest in our stores as we strive to provide the best shopping experience for our customers.
Our strong marketing programs continue to differentiate our brand and reinforce The Home Depot as the resource for anything from weekend projects, to unique holiday gifts, to gift cards for all occasions.
So in closing, our solid results are driven by the following three areas: Growth across our core merchandising categories, continued success from new innovative and distinctive products, and the positive impact from store modernization.
With a continued focus on these areas in 2005, our plan is to stay on strategy.
Let me now turn the call over to Dennis Donovan.
Dennis Donovan - EVP, Human Resources
Thank you, John, and good morning, everyone.
As you know, during the last few years we've leveraged human resources to competitively position our business.
The common denominator for success at The Home Depot is clearly our people.
It's our talent that really makes the difference.
As a result, our ability to attract, motivate and retain a high performing diverse work force is clearly essential.
Let me briefly highlight some of our strategic initiatives.
We developed key hiring partnerships with the Departments of Labor, Defense, and Veterans Affairs and the AARP.
These efforts are part of our fundamental approach to conducting business and are a key differentiator for The Home Depot among retailers, the Fortune 50, and Dow companies.
Last week we launched our fourth national hiring partnership with four of the country's leading national Hispanic organizations: ASPIRA, the Hispanic Associate of Colleges and Universities, the National Council of La Raza, and SER, Jobs for Progress.
These organizations are part of our partnership with HACR, the Hispanic Association on Corporate Responsibility.
This is the first time these organizations will work with a corporate partner in a single hiring initiative.
Together we'll work to recruit eligible candidates for leadership roles in full-time and part-time positions in our stores across the company.
We expect this relationship will provide future opportunities with the rapidly growing Hispanic community.
During 2004 we continued to focus on the development of our leaders and associates by investing in their future.
We designed a comprehensive retail leadership curriculum for positions ranging from department supervisors to district managers.
We also continue to create a pipeline of future leaders through several additional development programs.
To date, over 900 leaders have been recruited into our store leadership program and about 220 are now managing stores and districts.
Our merchandising leadership program is now recruiting its second wave of participants.
Programs have also been created for internal audit, entry-level leaders, and college interns.
For our store-level associates, we delivered about 23 million hours of learning in 2004.
Thirteen percent of this training was conducted through e-learning which drives efficiencies in terms of scheduling, delivery, costs, and information retention.
Now, effectively measuring, evaluating, and rewarding our associates is essential to our human resource mission.
With a focus on aligning the entire organization around success, all of our associates are on a common performance management process with a reward element called Success Sharing.
We believe Success Sharing is an industry leading incentive program that continues to generate positive results for the company and our people.
As Bob mentioned earlier, we will pay a total of $90 million to our full-time and part-time associates for 2004, nearly double what we paid in 2003.
The primary way we measure our success at attracting, motivating, and retaining a high performing diverse work force is through our employer of choice survey.
In the fourth quarter of last year we surveyed 300,000 associates across the entire enterprise and at all levels of the organization, and we received a remarkable 82 percent response rate.
This census survey allowed to us measure our progress against an initial baseline census survey performed in 2002 and externally with industrial, consumer, and retail companies.
Our organization is strong.
We achieved a four-point positive swing in our overall index from 2002 to 2004 which represents a significant improvement.
With respect to normative comparisons we were eight points higher than industry, and 14 points above the consumer and retail segments.
So morale in our stores remains high.
Our associates enjoy their work and believe that they're making an important contribution to Home Depot's success.
Lastly, and perhaps most importantly, our people express confidence in the long-term success of The Home Depot.
So to sum it up, we're focused on selecting, rewarding, and developing great leaders and talented associates with the right knowledge, experience, and behavior that drives a positive customer shopping experience.
Thanks a lot, and I'd now like to turn this call over to Carol.
Carol Tome - EVP & CFO
Thank you, Dennis, and hello, everyone.
I'd like to add my thanks to all of our orange-blooded associates for delivering on our strategic and operational objectives.
This was a year of many company records, including record earnings.
In 2004 we had over $1 billion in net earnings each quarter, and broke $5 billion in net earnings for the year, the first time in our history.
In the fourth quarter, our sales grew 11.2 percent to $16.8 billion, and our earnings per share grew by 11.9 percent to $0.47.
Comp, or same store sales for the fourth quarter were 4.6 percent, with comps of 2.3 percent in November, 5.7 percent in December, and 5.8 percent in January.
For the year, sales grew by $8.3 billion, or 12.8 percent to $73.1 billion.
Comp sales for the year were 5.4 percent, our best performance since 1999.
During the fourth quarter we opened 64 new stores, including seven stores in Canada, and two in Mexico.
We opened nine stores in November, 18 stores in December, and 37 stores in January.
For the year, we added 183 net new stores, bringing the total number of stores to 1,890.
Today we own 86 percent of our stores and believe our real estate ownership strategy is a competitive advantage.
Sales from new stores and stores that have been opened for less than one year, as well as sales from our newly acquired businesses, contributed 6.6 percent of our top line growth in the fourth quarter, and 7.4 percent for fiscal 2004.
Now, as you know, we strategically cannibalize our stores in order to grow market demand and top line sales.
In 2004 we cannibalized 17.5 percent of our stores which had a negative impact on comps of 2.2 percent.
Excluding the impact of cannibalization, comp sales would have been 7.6 percent for the year.
As of year end, selling square footage was 201 million, a 9.8 percent increase from last year.
The average square footage for store was 106,000 square feet, down slightly from last year reflecting the changing mix in our store formats as we expand into new geographies and size our stores to meet the needs of the market.
Customer transactions were 296 million for the quarter, an increase of 3 percent over last year.
For fiscal 2004, total customer transactions were 1,295,000,000, a 4 percent increase from 2003.
Now as a reminder, our cannibalization strategy impacts the number of customer transactions in our comp stores.
As both Bob and John mentioned, our average ticket reached record highs in both the fourth quarter and year.
And we are positioned for continued growth in this area by adding innovative and distinctive merchandise with a renewed focus on customer service.
For the fourth quarter, weighted average weekly store sales were $667,000, about the same as we reported last year.
For fiscal 2004, weighted average weekly store sales were $766,000, slightly higher than last year.
Sales per square foot were approximately $327 for the quarter, up slightly over last year, due in part to a higher percentage of stores located outside of the United States.
At the end of the year we had 161 stores in Canada and Mexico, and these stores have lower sales per square foot than our average U.S. stores.
Excluding these stores, the increase in sales per square foot was 1 percent.
Now, for the year, our total sales per square foot were $375, an increase of over $4 per square foot from last year.
We expect our store productivity to continue to improve.
Gross margin was 34.2 percent for the fourth quarter, an increase of 145 basis points from the same period last year.
Now, our fourth quarter results were impact by the following factors.
First, 117 basis points, or $201 million, was directly related to advertising co-op allowances which we now account for as a reduction in the cost of merchandise sold consistent with EITF 02-16.
Second, lower shrink than we experienced one year ago contributed 23 basis points, and finally, 5 basis points was due to the net impact of modest gross margin benefits arising from a change in our merchandising mix, offset in part by the cost of our deferred interest program that provides purchasing flexibility to our customers.
For the year, our gross margin rate was 33.4 percent, an increase of 167 basis points from last year.
Excluding the impact of EITF 02-16, our gross margin rate for fiscal 2004 was 32.2 percent, the highest annual rate in our company's history.
In the fourth quarter, total operating expenses increased 151 basis points to 24.3 percent of sales.
Excluding the impact of EITF 02-16, total operating expenses for the quarter increased by 46 basis points.
Now, this is due primarily to two factors.
First, given our strong sales performance, we experienced higher expenses in connection with our sales incentive programs, like our store success sharing program and our management incentive plan.
In the fourth quarter, our incentive-based programs were 54 million higher than last year.
As Dennis mentioned, we are pleased to share our success with our associates who drove a 3 percent increase in sales per labor hour in fiscal 2004.
Second, our planned investment in store modernization caused remodel and repair expense, as well as depreciation, to rise at a faster rate than our sales growth.
Now, we continue to believe that investing in our stores is the right thing to do and will generate leverage in the future.
For the year, total operating expenses as a percent of sales were 22.6 percent, an increase of 139 basis points from last year.
Excluding the impact of EITF 02-16, our expenses as a percent of sales were essentially flat to last year.
Operating margin for the fourth quarter was 9.9 percent, and for fiscal year 2004 was 10.8 percent, a company record.
Consolidated net earnings totaled $1 billion for the quarter, and just over $5 billion for the year.
Earnings per share increased by 11.9 percent to $0.47 for the fourth quarter.
For fiscal 2004 earnings per share were $2.26, a 20.2 percent increase from fiscal 2003.
Excluding the impact of EITF 02-16, earnings per share for the year were $2.30, an increase of 22.3 percent.
Diluted shares for both the fourth quarter and fiscal year 2004 were 2.2 billion shares compared to 2.3 billion shares in both fourth quarter and fiscal 2003.
Now this reduction is due to our share repurchase program.
Since its inception in 2002, and through the end of our fiscal year 2004, we have repurchased $6.7 billion under our $7 billion share repurchase program, representing 200.5 million shares.
Of that, 84.8 million shares were repurchased in 2004.
Now, let's review some other metrics.
At the end of the year, total inventory was $10.1 billion, an increase of 11 percent from last year, reflecting the addition of new stores and inventory in our newly acquired businesses like White Cap.
On a per-store basis, inventory levels of 5.3 million were flat compared to last year.
Inventory turns were 4.9 times, down slightly from 5 times in fiscal 2003, reflecting our changing business portfolio.
Computed on beginning long-term debt and equity for the trailing four quarters, fiscal 2004 return on invested capital was 21.5 percent, an increase of 110 basis points from last year.
Excluding cash and short-term investments, return on invested capital was 24.5 percent.
We continue to drive increasing rates of return on the capital we employ, using a portfolio approach.
Our capital expenditures totaled $3.9 billion in fiscal 2004.
Over 60% of this spending was for new stores, while the balance went to store modernization, technology, and other initiatives.
Our year-end cash and short-term investments totaled $2.2 billion, reflecting $7.9 billion in cash generated, offset by $3.9 billion in capital expenditures, $3.1 billion for the repurchase of common stock, $727 million paid for acquisitions, and $719 million in dividends.
Our financial condition remains unparalleled in retail.
At the end of the year we had $39 billion in assets, $24 billion in equity, and a low debt to equity ratio of 8.9 percent.
Our financial condition, coupled with our relentless focus on execution, gives us a strong platform for continued growth in 2005.
As we discussed at our January investor conference, our fiscal 2005 growth guidance is to grow sales by 9 to 12 percent, and to grow our earnings per share by 10 to 14 percent.
We started the year on plan, and while we are up against tough comparisons in the first half of the year, we are highly confident of our ability to deliver upon our 2005 guidance.
So thank you for your participation in today's call.
And, Jake, I believe we are now ready for questions.
Operator
If you would like to ask a question today you may do so by simply pressing the star key followed by the digit one on your touch-tone telephone.
Do keep in mind that we are asking for you to limit yourself to one question per caller so we can have maximum participation.
Once again, one question per caller.
And as a reminder, star one if you have a question.
We'll take our first question from Dan Wewer with CIBC.
Dan Wewer - Analyst
Good morning.
Carol, you had indicated the interest rate promotions was weighing against the gross margin rate during the quarter.
Curious if the growing cost of this program will incentivize Home Depot to rely less on this kind of promotion in the future?
Carol Tome - EVP & CFO
Well Dan, as we said all year long we've been able to offset the cost of our deferred interest programs with gross margin expansion and that trend continued in 2004.
Our private label credit card is an important value proposition that we offer our customers.
The penetration of private label at the end of the year was about 24 percent.
And so we believe this is the right thing to do for our customers.
Bob Nardelli - Chairman, President & CEO
Yeah, we feel confident of our ability to continue to respond to our customer demands within our gross margin guidance.
Dan Wewer - Analyst
And then on the follow-up question, the distribution center opens in the third quarter, I believe, and how will that impact inventory growth during the second half of the year?
Carol Tome - EVP & CFO
At our January investor conference we talked about our plans to open a pilot at the end of the year and we're moving forward with those plans.
Clearly, Dan, the reason for to us look at our supply chain is to look at, as we talked about at our January investor conference, about taking costs out of the system, taking tasks out of the stores, and to improve the velocity of our inventory.
Dan Wewer - Analyst
So will we initially see an increase in inventory investment until we begin to anniversary the opening of these distribution centers?
Carol Tome - EVP & CFO
Inventory on a per-store basis has remained flat and that's our intention going forward.
Dan Wewer - Analyst
Okay.
Great.
Thanks
Operator
We will now move to Bill Sims with Citigroup Smith Barney.
Bill Sims - Analyst
Good morning, This question's for Carol.
Clearly Carol, you have one of the strongest balance sheets in retail with debt to cap of 8 to 9 percent, but by the same token an unlevered balance sheet could potentially limit your financial flexibility.
I've seen that you've started to lever up the balance sheet.
What's your strategy, and how should we look at it going forward?
Carol Tome - EVP & CFO
We believe our financial condition has a competitive advantage and everything that we do is under the overarching principal of maintaining our long-term debt rating of double A. Clearly, as you mentioned, in 2004 we took advantage of an attractive interest rate environment and raised a billion dollars of fixed rate notes.
We've actively taken our cash that we generate from operations to return it back to our shareholders as well as continue to invest in our business and you should continue to see those kinds of activities coming from The Home Depot.
Bill Sims - Analyst
Thank you.
Operator
We'll now take a question from Budd Bugatch with Raymond James.
Budd Bugatch - Analyst
Good morning, bob and Carol, Dennis and John.
A quick question.
I noticed in the trade press that you seem to be opening up a new floor store in Dallas.
Can you give us some clues on what your strategy might be?
You've got two of them, I think, now, and I thought that program was on hold for a while.
Bob Nardelli - Chairman, President & CEO
Bud, good morning.
Let me just say, again, part of our overarching strategy, whether it's bringing new, distinctive, and innovative merchandise into the store, or, Budd, as you're certainly familiar with our Manhattan and Park Royal format, we believe one of our strongest attributes is the ability to bring the entrepreneurial spirit and flexibility.
So this is, these are tests this is really looking at the market, looking at the fact that there are, it's a very decentralized market, and that's being run underneath Frank Blake, and Frank is in the room and may want to just comment a word or two on that.
Frank Blake - EVP, Business Development & Corporate Operations
No, you said it exactly, Bob.
We are experimenting with a new format.
We think we learned quite a bit from the two floor stores that we have now, and we see an opportunity that we're pursuing, as you said, in the Dallas market.
Carol Tome - EVP & CFO
And just a couple of technical points, these will be branches, not stores, so they are not included in the store count that we have shared with you for 2005.
We will run the sales through the existing floor store and they will be included in comps for next year.
Budd Bugatch - Analyst
Thanks so much Carol.
One follow-up.
I know that your year-over-year market share in appliances went up about 190 basis points.
I wondered if could you give us any feel of what happened in the fourth quarter?
It seems to me maybe that flattened out a bit.
John Costello - EVP, Merchandising and Marketing
We think the rolling 12 months is a better measure of long-term growth.
I think you'll continue to see quarter-by-quarter fluctuations based on the timing of new product introductions and seasonal trends as well.
So we think the long-term rolling 12 months reflect the best indication of appliance growth.
Budd Bugatch - Analyst
Okay.
Thanks, John.
I think I probably agree with you on that.
Okay.
Thank you.
Operator
And now moving to David Schick with Legg Mason.
David Schick - Analyst
Hi.
Good morning.
To drill back into the financing offers again for anyone, I guess just two points.
Anything else you can drill into the cost, you know, you mentioned the offset, but a little bit more on the level would be helpful.
And then secondly, if you could talk about when you roll any type of financing offer to the customer out, whether that's pulling forward demand and you see less impact for it going forward, how you to have change those financing offers up, and how we should think about the use of financing to drive demand in which pockets of the store and again how much pulled forward demand essentially do you think that those programs create would be helpful.
Thank you.
Bob Nardelli - Chairman, President & CEO
David, this is Bob.
I'm going to give you one or two comments and then I'll ask Frank, who runs our private label credit business, and Carol to comment.
But first of all, let me say that this is, we use credit, as you know, we have a standard six-month deferred on 299 and above and Frank will comment that this is a very important part of our customer's view on the private label credit card.
The 12-month deferred, quite honestly, is not pulling forward but really helping close and convince customers at the time of purchase.
And we see this again as a tremendous competitive advantage, and quite honestly, sometimes we're finding ourselves having to match the competition as they pull forward in the marketplace on some of these incentives.
So as Carol indicated earlier, we're very pleased with the service that we're getting from our private label.
Our voice of customer continues to reinforce the importance of this, as we continue to add private label credit card subscriptions, and we think going forward we'll continue to have a balanced approach and also be prepared to meet the competition if that's the case.
Frank, do you want to comment on the voice of customer?
Frank Blake - EVP, Business Development & Corporate Operations
I guess I'd just add two other points.
First, as Carol I think has mentioned before, this is our cheapest form of credit in the stores.
And second, on the question of whether we're pulling sales forward, we do an analysis on every credit promotion on incremental sales versus what the sales would have otherwise been, and justify each promotion on that basis, on an incremental sales basis.
David Schick - Analyst
Thanks.
That's very helpful.
Bob Nardelli - Chairman, President & CEO
Okay, David.
Operator
Danielle Fox with Merrill Lynch has the next question.
Danielle Fox - Analyst
Thanks.
I have a question about the receivables.
I'm wondering what drove the apparent increase in receivables this quarter?
Was it a more aggressive pursuit of the pro customer?
And how should we be thinking about working capital in fiscal '05 as a source or use of cash?
Carol Tome - EVP & CFO
Well, Danielle, good morning, and congratulations on the birth of your baby.
Danielle Fox - Analyst
Thank you.
Carol Tome - EVP & CFO
Let me explain to you what happened on receivables.
We had a $400 million year-over-year increase on receivables. $237 million of that are found with the newly acquired businesses like White Cap.
White Cap alone is $100 million of that increase.
Now we've had an increase as our penetration of credit card usage has increased in our stores, we've had an increase of about $100 million due to increased penetration of credit cards.
So hopefully that helps you understand the year-over-year increase in receivables.
For working capital going forward, we're expecting pretty much flat on a networking capital basis.
Danielle Fox - Analyst
Okay.
Then just one quick follow-up on the forecasting for '05.
If could you just walk us through your latest thinking on how the EITF 02-16 adjustments which hurt EPS by about $0.04 in '04 will affect EPS and inventory in '05.
Carol Tome - EVP & CFO
Well, clearly, we have worked through EITF 02-16 so we will have no earnings impact in 2005.
So you need to think about that as you're building your model.
And similarly on inventory, there'll be no impact on inventory in 2005.
Danielle Fox - Analyst
Thanks very much.
Carol Tome - EVP & CFO
Thank you.
Operator
And now moving to Michael Baker, Deutsche Bank.
Michael Baker - Analyst
Hi, thanks.
My question is, you totaled these sales from the other channels and the new stores this quarter and for the year, two questions around that.
Can you tell us what it was last year, then can you break out that between the new stores and the other channels?
And then I guess a third, what do you expect that to do going forward?
Thanks.
Carol Tome - EVP & CFO
Well, sure.
If I understand your question completely, our comps last year were 3.8 percent, and our total sales growth last year was 11 percent, so the contribution from stores that had been opened for less than one year and from the newly acquired businesses was about 7 percent.
Michael Baker - Analyst
But can you break that out between what was from the new stores and what were from the other businesses?
Carol Tome - EVP & CFO
Sure.
The bulk of it was from new stores.
Michael Baker - Analyst
And this year would that be the same?
Carol Tome - EVP & CFO
We got about one point of total growth from the newly acquired business.
That help?
Michael Baker - Analyst
Yes, that's exactly what I was trying to get at.
And I imagine that grows a little bit as we go forward?
Carol Tome - EVP & CFO
Absolutely.
Michael Baker - Analyst
Okay.
Thank you.
Carol Tome - EVP & CFO
You're welcome.
Operator
And now Colin McGranahan, Bernstein, has the next question.
Colin McGranahan - Analyst
Good morning.
Actually a follow-up question for Frank on credit card in general.
Two-part question.
First, Frank, can you just comment on maybe how much of the lack of gross margin improvement came as you anniversaried the switch to Citi from GE?
And then more broadly, can you talk a little bit about, you know, we've seen Wal-Mart launch a credit card on the Discover Network, obviously some lower interchange, but a card that can be used outside of Wal-Mart.
And it looks like in the environment for credit and retail we're seeing some evolution.
Can you talk about where your business is on a private label basis and whether you've talked about or thought about broadening that appeal?
Bob Nardelli - Chairman, President & CEO
Colin, I'm going to have a two-part response to this.
I'm going to let Frank cover the last half of your question about where he and the business has positioned both the private label and the switch that we've made, and then Carol can address the financial part of it but, Frank can talk clearly about our strategic direction here, and as you mentioned, about fees and interchange and so forth.
Frank.
Frank Blake - EVP, Business Development & Corporate Operations
Do you want me to address the second part on growing credit services?
Bob Nardelli - Chairman, President & CEO
Please.
Frank Blake - EVP, Business Development & Corporate Operations
Colin, I think the observation is right on Wal-Mart and their introduction of, I guess, what you call a dual-purpose card.
We are clearly looking at expanding the kinds of credit services that we can provide both to our consumers and our pro segment, and we see a lot of opportunity for new products in those areas.
It would be a little premature at this point to go through the new products that we have on the drawing board.
Carol Tome - EVP & CFO
And, Colin, for competitive purposes I hope you can appreciate that we're not going to break out the cost, but as Frank mentioned, there's a cost associated with the deferred programs that runs through gross margin and we've covered that cost through expansion in the merchandising mix.
We've done it every quarter, we did it for the year.
If you back out EITF our gross margin was up 51 basis points year-over-year.
We also get a benefit that runs through our selling and store expenses because there is a transaction cost associated with every type of tender, and for credit cards, our private label credit card has the lowest cost.
So there's a benefit on the expense line as a result.
Colin McGranahan - Analyst
And Carol, just following up on that, when did you fully anniversary, though, the switch to Citi, and how much of an impact?
Is that showing up this quarter for the first time where we're just seeing less of a positive impact?
Carol Tome - EVP & CFO
No, we've been talking about it all year.
We anniversaried in August.
Colin McGranahan - Analyst
Okay.
Bob Nardelli - Chairman, President & CEO
Thanks, Colin.
Colin McGranahan - Analyst
Thank you.
Operator
Alan Rifkin, Lehman Brothers, has the next question.
Alan Rifkin - Analyst
A question for John.
John, you mentioned that as part of your store modernization program the categories that you continue to refresh continue to outperform the others.
Can you maybe provide a little bit of color as to what the immediate impact you're seeing on newly added categories are?
And then secondly, can you maybe just provide some color as to how categories that were refreshed early in the program are now performing?
Thanks.
John Costello - EVP, Merchandising and Marketing
Yeah, I think we've made a lot of progress in three areas.
The first is in the quality of our refreshes.
The second is minimizing store disruption, and the third is piloting the refreshes so we can learn from the pilots and expand.
So what we're seeing is that, as I mentioned in my comments, the current refreshes are outperforming the total store.
Also, as we expand these refreshes in the early tests, we're able to make adjustments and learn from that as we roll it out, so we can increase the sales lift and minimize the store disruption.
Early on we did get some disruption in some of our early refreshes and store modernizations but I think we've made a lot of progress in that over the past year.
And it varies.
The speed of impact varies.
We're also using these refreshes as opportunities to integrate special order and increase the assortment and by providing increased assortment for our customers as well as an easier shopping environment, it's helping.
So a good example, you're familiar with our appliance rollout last year.
This year, concurrent with LG, we're also updating our appliance centers which will accommodate that brand and also provide a better shopping environment.
So we're also combining resets with the addition of new brands and additional SKUs and incorporation of special order.
Alan Rifkin - Analyst
Okay.
Thank you.
How many categories do you anticipate refreshing in '05 overall?
John Costello - EVP, Merchandising and Marketing
We have not specifically mentioned that other than a real commitment, you know, for competitive reasons we've not been specific on the number of categories and really have not announced any specific ones beyond what is rolling out right now, as I'm sure you can appreciate that.
Carol Tome - EVP & CFO
But clearly the roll out of those initiatives are reflected in the guidance that we've given for you in 2005.
Alan Rifkin - Analyst
Thank you.
John Costello - EVP, Merchandising and Marketing
Thanks, Alan.
Operator
And now Stephen Chick with J.P. Morgan.
Stephen Chick - Analyst
Thanks, Carol, just with your guidance for '05 I think implied is modest operating margin expansion and we're not seeing in that current results, so can you speak as to what's going to happen sequentially that's going to get better from here?
Carol Tome - EVP & CFO
Well, if we backed out, now hopefully this will help you, if we back out the expenses associated with our incentive plans and the expenses associated with repairs and remodels, we would have leveraged expenses in the fourth quarter.
So I think that's important to keep in mind as you plan and build your models for 2005.
Stephen Chick - Analyst
Okay.
So those, some of those expenses are going to abate, I guess, as we go through 2005?
Carol Tome - EVP & CFO
That's correct.
Stephen Chick - Analyst
Okay.
Okay.
Great.
And then second thing, Bob, you had mentioned I think a management change within Home Depot Supply and the involvement of Joe DeAngelo.
Is that significant, and can you speak to if that changes Jim Stoddard's role at all?
Bob Nardelli - Chairman, President & CEO
Yeah, let me just say I did mention as part of the ongoing transformation, I mentioned two in my comments this morning.
One was the continual alignment in the field with our orange box which Tom Taylor now has the responsibility for running, along with Mexico.
And I think it's that alignment which will allow for consistency and uniformity and partnering Tom with Carl Liebert, so that we clearly have a hard process operational view that they will then combine with John Costello.
So the streamlining of the organization we think is part of the natural evolution of the organizational structure that we put in place some four years ago, along with the strategy.
We also knew that at the same time, while we were putting a lot of emphasis in two areas, one what I'll call pro in the box, which is about 30 percent of our sales, and then the new adjacent platform of Home Depot Supply.
We knew at some point for efficiencies and common face to the customers that we would bring those two together, but we wanted to have a laser focus over the past couple of years to do that.
As a matter of fact, one of Tom Taylor's jobs when he came in from the field was to work on pro in the box.
We thought it was time, at the beginning of the year, it's always good to revisit and then reset the game, so the fact is, Joe DeAngelo has taken on that responsibility and Jim Stoddard, we're very pleased to say, is going to be working very hard at new initiatives, whether it's the floor store or others to be announced, to really accelerate the adjacencies of growth through new vertical platforms which is part of our overall strategy as we redefined a $900 billion market opportunity is to put key resources in these new emerging mega trends to have the talent and the consistency to grow.
So I hope that answers your question.
Stephen Chick - Analyst
Yep.
That's great.
Thank you very much.
Diane DeHaas - VP - IR
Jake, we have time for one more question.
Operator
We'll take our final question from Dan Binder, Buckingham Research.
Dan Binder - Analyst
Good morning.
A couple of questions for you.
First, in the third quarter, post the hurricanes, saw some negative gross margin impact from the initial buying of building materials.
Just curious in Q4 as we got further removed from the storms if there was any kind of a gross margin benefit for more of the finished goods?
And then second question is related to new store productivity.
You had mentioned earlier in the call that you were planning on productivity improving.
Were you talking about comp stores strictly or new store productivity as well?
Carol Tome - EVP & CFO
Let's answer your last question first.
The comment on store productivity was for all stores, new and existing stores, particularly in the markets like Mexico as we become more mature we're going to have increased productivity there, and Canada as well.
As for gross margin, John, would you like to address that?
John Costello - EVP, Merchandising and Marketing
I think the impact on those was neutral as we use our scale and supplier relationships to pass savings along to our customers in the affected areas.
Thanks.
Diane DeHaas - VP - IR
Thank you everyone for joining us today and we look forward to talking to you next quarter.
Operator
And that will conclude today's conference.
We thank you for your participation.
Have a wonderful day.